If Brunei Takes China’s Energy Deal, Neighbors May Follow

TAIPEI, TAIWAN Brunei, an oil-rich nation in Southeast Asia, watched with near horror as world energy prices fell from 2014 to 2016. Reserves were running out. Its lifeblood of 80 years at stake, the tiny, wealthy country is looking for other sources of prosperity.

China is offering to be a source, and it’s China that stands to prosper politically.

Chinese President Xi Jinping agreed to support joint exploration with Brunei for oil and gas, likely in a rectangular block of the South China Sea extending from the Bruneian coastline on the island of Borneo. That’s Brunei’s exclusive economic zone, but China says some of it falls under its flag.

A deal would help Beijing by showing skeptics in Malaysia, the Philippines and Vietnam that ties with China pay off despite sovereignty disputes like who should rule Brunei’s exclusive economic zone.

China’s saying, ‘We’re promoting joint development, we’re willing to cooperate, it’s win-win for everybody,’ said Carl Thayer, professor emeritus with the University of New South Wales in Australia.

Without a better name around Southeast Asia, China risks more pressure from an alliance including Australia, India, Japan and the United States. Those countries, more militarily powerful as a unit than China, want Beijing to quit expanding control in the disputed sea over objections from smaller Asian governments whose economic zones overlap Chinese claims.

Brunei as a model

China has invested about $4.1 billion in Brunei. There’s an energy equipment service contract, to start, and Chinese companies built a 2,680-meter-long sea bridge. One offered $79 million worth of bonds earlier this year to fund a petrochemical plant. A $3.4 billion oil refinery is in the planning stages.

Any deal that China has with ASEAN would be a good role model. It’s like the onion skin being peeled off one by one and it makes (a) good business case for China that they are interested in the commercial part of it, said Eduardo Araral, associate professor at the National University of Singapore’s public policy school. ASEAN refers to the 10-country Association of Southeast Asian Nations.

For Brunei the good thing is they don’t have to fend off China, he said.

Energy makes up some 60 percent of the Bruneian GDP. The economy shrank 2.5 percent in 2016 before rising 1.3 percent last year along with world energy prices, but much of the undersea fuel near Brunei’s coasts is tapped out.

Brunei keeps quiet about the sovereignty problem with China even as fellow Southeast Asian states Vietnam and Malaysia, under new Prime Minister Mahathir Mohamad, speak out. China takes Brunei’s silence as goodwill and a vote for more ties with China’s $12 trillion economy, the world’s second largest.

In late November the Chinese president met Brunei’s Sultan Haji Hassanal Bolkiah in the Southeast Asian leader’s capital Bandar Seri Begawan. The leaders agreed to support relevant enterprises of the two countries to cooperate in the areas of maritime oil and gas resources, China’s official Xinhua News Agency reported Nov. 20.

Brunei has just 430,000 people but sits on 1.5 billion barrels of crude oil reserves plus 15 trillion cubic feet of natural gas beneath the seabed, according to the U.S. Energy Information Administration.

The Philippines may be next for a China deal. In November Manila and Beijing signed a memorandum of understanding that establishes a process to do joint offshore oil and gas exploration. Malaysia leads in the South China Sea with access to reserves of 5 billion barrels of crude oil and 80 trillion cubic feet of gas.

Search for equity

Whether other countries trust China as an energy exploration partner depends on how a Brunei deal takes shape. It should be done under the laws of both sides and international agreements, South China Sea analysts say.

You have to find out under whose law, under whose jurisdiction this kind of joint exploration (takes place), said Termsak Chalermpalanupap, a fellow with the ISEAS Yusof Ishak Institute in Singapore. In the past, it was always under Chinese law, under Chinese jurisdiction, which implied that everything in the South China Sea belongs to China. That’s the main objection.

A deal with Brunei consistent with a China-ASEAN maritime code of conduct would help Beijing’s cause, said Carl Baker, director of programs with the think tank Pacific Forum CSIS in Honolulu. The code, still being negotiated, would spell out how to avoid mishaps despite sovereignty issues. China might also consider deferring its claims, he said.

China, backed by Asia’s strongest armed forces, has upset the other five maritime claimants by building up small islets for military use and passing coast guard ships through disputed tracts.

If China could convince Brunei to undertake joint exploration in a disputed area, it would certainly help set a precedent for others, Baker said.

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